Mexico's banking system changing

Long under rigid government control and ownership, Mexican banks reverted back to the private sector in 1991 and 1992. The banking changes now underway hold potential advantages for U.S. exporters trading goods south of the border.

During the 1980s, the purpose of the Mexican banks was to finance the country's fiscal deficit and to make loans to certain sectors of the Mexican economy, according to Dan Miller, financial analyst with USDA's Agricultural Stabilization and Conservation Service (ASCS). Credit was based more on political decisions than on supply and demand. The government made the key operational decisions and hired most bank management.

Today, Mexican banks are privatized and controlled by groups of shareholders, which usually have a lead investor, who, in many cases, is the chief executive officer of the bank. Under privatization, the majority of the bank shares are held by private corporations or other shareholders.

According to Miller, Mexican banks are under new management and their objectives have changed. Now, their purpose is to make a profit for shareholders. The Mexican Government still owns Mexico's Export-Import bank, a domestically-oriented development bank, and several other development banks.

Mexico Permits Universal Banking

"Privatization opened up a new banking sector and changed the way Mexican banks conduct business," said Miller. "Legislation passed in Mexico in 1975 introduced multi-banking, a concept which allows banks to consolidate different types of lending operations."

With the passage of the Financial Groups Law in 1990, universal banking was permitted in Mexico. This means that banks and other kinds of financial institutions such as stock brokerages, insurance companies and leasing companies may be held by one financial holding company that can offer related services.

Banks in the United States are not permitted to sell insurance or stock or offer related services. But under Mexico's new regulatory environment, Mexican banks may conduct universal banking and combine banking services with brokerage firms. The newly privatized banks in Mexico are much larger and more powerful entities than those in the past. They are becoming more efficient, more profitable and more sophisticated, but they require more regulation.

Banking Becomes Easier

All these changes in the Mexican banking system could be good news for U.S. agricultural exporters.

"Privatization of Mexican banks means that financial flows between the two countries will run more smoothly than they did before," said Miller. "U.S. exporters will be conducting business with Mexican banks that operate in a private sector environment. U.S. exporters will know what to expect, and they may run into fewer problems with their export transactions than they might have six years ago," he said.

U.S. exporters will recognize the regional banking concept in Mexico, a system that is also popular in the United States. In northern Mexico, there is a regional bank called Banco Mercantil del Norte (Banorte) and it is most prominent in the Monterrey region. Even though it cannot compete with the large banks in Mexico City, this bank dominates much of the Monterrey region. It conducts commercial transactions and provides much financing for imports into Mexico.

Greater Focus on Customer Service

"Understanding the Mexican banking process can help U.S. exporters plan their shipments by knowing what regulations they need to follow, what type of documentation will have to be provided, and how long it will take to complete the process," said Miller. "This will save U.S. exporters a lot of time and even money. With privatization, exporters can expect Mexican banks to be more agile and to place a higher priority on their customers."

According to Miller, when U.S. exporters trade south of the border they may find additional help with the implementation of the North American Free Trade Agreement (NAFTA). The agreement opens Mexico to U.S. and Canadian banks, which means that U.S. banks will be able to establish subsidiaries in Mexico and even finance some U.S. exports. By opening offices in Mexico, U.S. banks can create more financial options for U.S. exporters.

As the banking system continues to improve, more banks from the United States, Canada and other countries will want to compete in Mexico.

"The only U.S. bank in Mexico now is Citibank," said Miller. "It has had a presence there since 1928 and is the only foreign bank with subsidiaries in Mexico."

Miller added that the exporters' banks in the United States also can develop long-term correspondent relationships with banks in Mexico that will speed up banking transactions. U.S. banks establishing subsidiaries in Mexico will contribute to the creditworthiness of the Mexican banking sector by adding expertise and training to the financial community in Mexico.

Miller says Mexican banks are providing financing to U.S. and Mexican corporations in Mexico for all kinds of investments. As a result, the economy will continue to expand, creating a demand for more U.S. agricultural goods to meet the needs of the Mexican people.

U.S. exporters should keep in mind that even though Mexico's banking system has undergone privatization and that the country operates under more of a market economy, the government still has a strong regulatory presence in the banking system. Vigilant bank supervision is necessary in light of the increase in size and complexity of many Mexican banks.

"Mexico has adopted many of its international regulatory standards from the Bank of International Settlements Basle Accord in Switzerland," said Miller. The United States and other developed countries also use these standards as a model to regulate their banking systems.

"By adopting these standards, Mexico creates a more stable banking system that in the long run should help U.S. firms doing business there."

COPYRIGHT 1994 U.S. Department of Agriculture
COPYRIGHT 2004 Gale Group